which is the better vehicle for your business?

© 2021 Crowe Malaysia PLT 1

Audit / Tax / Advisory Smart decisions. Lasting value.

LLP or Sdn Bhd: Which is the better vehicle

for your business?


Limited Liability Partnerships are a new vehicle for doing

business since 2012. Many businesses use the LLP

vehicle, especially professional firms e.g. accountancy

firms, which are not allowed to operate as a Sdn Bhd.

In the past, these professional service firms used to

operate under a conventional partnership which suffers

from unlimited liability on the part of the partners should

the partnership enter into a capital deficit position

especially if the partnership gets sued.

In contrast, a Sdn Bhd provides a limited liability

structure where liabilities are limited to the share capital

of the company.

In this commentary, we will show the differences between

the use of an LLP and a Sdn Bhd. We will not comment

too much on their similarities or on minor issues.


Given the choice, which is a better vehicle to use when an entrepreneur wishes to embark on a business?


LLP

LLP formation costs are likely to be

about RM1,500 compared to

company formation costs of about

RM4,000. The savings are mainly

because of the lesser government

fees for forming a LLP (RM500)

versus government fees for

forming a Sdn Bhd (RM1,250).

Professional fees may be lesser

for forming a LLP due to a less

complicated process compared to

that for a Sdn Bhd. A specially

tailored constitution (previously

known as M&A or Memorandum

and Articles of Association ) for a

company and a LLP agreement for

a LLP can bump up the

incorporation costs of the

respective entities significantly due

to the legal fees involved.

For companies incorporated under

the Companies Act 2016, the M&A

is called the “Constitution”. For

companies incorporated under the

previous Companies Act 1965, the

M&A is still being referred to as

Memorandum and Articles of

Association.

Incorporation Costs


Sdn Bhd

Company formation costs are

about RM4,000.


LLP

An LLP generally has lower annual

maintenance costs because a LLP

does not need company secretarial

services or an annual audit.

However, if an LLP were to borrow

money from the bank, the bank

may insist on having audited

accounts. The necessity for tax

services will be the same for both

types of entities

Annual maintenance costs


Sdn Bhd

Sdn Bhds require an annual audit

and the services of a company

secretary. Audit fees vary depending

on the size of the company but

typically for a company with RM1

million turnover, the audit fees may

be about RM4,000. Company

secretarial retainer fees may be

approximately RM2,000 per year but

additional fees may be charged for

special exercises e.g. for issue of

shares or drafting of Sdn Bhds

require an annual audit and the

services of a company secretary.

Audit fees vary depending on the

size of the company but typically for

a company with RM1 million

turnover, the audit fees may be

about RM4,000. Company

secretarial retainer fees may be

approximately RM2,000 per year but

additional fees may be charged for

special exercises e.g. for issue of

shares or drafting of resolutions for

non-routine business activities.


LLP

The partners in a LLP are partially

protected against liabilities

because the LLP’s liability is

generally limited to the paid-up

capital of the LLP. However, an

LLP partner is personally liable in

tort without limit e.g. professional

negligence but the other LLP

partners are not personally liable.

Unfortunately, the LLP is liable to

the same extent as that partner in

tort and the liabilities of the LLP

shall be borne out of the property

of the LLP.

Nevertheless, partners in an LLP

still enjoy better protection than

partners in conventional

partnerships because all partners

in a conventional partnership are

exposed to unlimited personal

liability.

Protection against liabilities


Sdn Bhd

The shareholders and directors in a

Sdn Bhd are not generally exposed

to unlimited liability. The liability of

the Sdn Bhd is limited to the share

capital.


LLP

LLPs have simpler administration

processes and do not require a

company secretary unlike that for a

Sdn Bhd. However, a LLP requires

a compliance officer who is a

partner of the LLP or an external

company secretary. For good

administration, LLPs should still

maintain proper registers (e.g. of

partners), minutes of meetings, etc.

Administration Process


Sdn Bhd

Sdn Bhds have more complicated

administration processes. Some

decisions made by a company

require informing the Companies

Commission of Malaysia (SSM) via

the submission of forms, etc.

Transparency

LLP

LLPs need to file an annual

declaration with the SSM within

90 days from the end of the

LLP’s financial year. The

declaration will contain certain

financial information of the LLP

such as revenue and profit after

tax for the year.

Sdn Bhd

Sdn Bhds which are exempt private

companies do not have to file accounts

with the SSM. These Sdn Bhds

therefore enjoy more privacy compared

to LLPs.


LLP

Both the LLP and the Sdn Bhd are

taxed in their own name. Although a

LLP is a partnership, it is taxed like a

company. Both LLPs and Sdn Bhds

enjoy the lower SME income tax rate

of 17% if conditions are met.

However, LLPs do not enjoy as

much tax incentives as Sdn Bhds

e.g. Reinvestment Allowance,

although they both enjoy certain tax

incentives e.g. double deduction for

Structured Internship Programme.

Income Tax of the Entity


Sdn Bhd

Sdn Bhds enjoy more tax incentives

Income tax of the partners / shareholders

LLP

Partners of a LLP are taxed in the

same way as the shareholders of

a Sdn Bhd in that both of these

parties are not taxed on their

dividends received. However, the

remuneration e.g. salaries and

bonus of LLP partners, are taxed

like those of an employee.

Remuneration to be paid to the

partners should be documented in

the LLP agreement in order to

obtain tax deduction.

Sdn Bhd

Sdn Bhds have simpler rules to comply

with in order to obtain tax deduction of

remuneration paid to directors


LLP

For professional service firms e.g.

audit firms which are not allowed

to be organised as a Sdn Bhd, the

LLP structure is appropriate and is

used by most of the large firms in

the country. Nevertheless, a LLP

is presently viewed as a vehicle

for small businesses until such

time when large LLPs start to

sprout in the market.

For Growth and Expansion


Sdn Bhd

Sdn Bhds have more credibility

because of the need to prepare

annual audited accounts and the

abundance of Sdn Bhds which are

large businesses. Sdn Bhds may

find it easier to raise funds generally.

Public companies (i.e. Bhds) are the

principal vehicles allowed for an IPO

(Initial Public Offering or listing) on

the stock exchange.

Ease of conversion from a conventional

partnership to an LLP or Sdn Bhd

LLP

A conventional partnership can

dispose of its business to a LLP

similar to that for a company.

However, this process involves

complications on transfer of

contracts, assets, liabilities, staff,

etc. Stamp duty will also be

applicable. Another route available is

the “conversion” of a conventional

partnership to a LLP provided by

Section 29 of the LLP Act. Under

this option, the properties, assets,

liabilities, clientele, contracts, etc.

will be automatically transferred to

the LLP. Stamp duty or real property

gains tax exemption which was

previously allowed has expired.

Sdn Bhd

There is no option for a conventional

partnership to be converted to a Sdn

Bhd. Instead, the partners in a

conventional partnership have to

dispose of their partnership business

(or parts of the partnership business) to

the Sdn Bhd. The sale may attract

stamp duty or real property gains tax,

as the case may be.

© 2021 Crowe Malaysia PLT 9© 2021 Crowe Malaysia PLT

If you have any queries on LLPs or require assistance in forming

an LLP or a Sdn Bhd, please feel free to contact us. Please note

that the information above is given without prejudice and users

should seek professional assistance before relying on any of the

information herein.

Overall, the choice between

using an LLP vs a Sdn Bhd

depends on the

entrepreneur’s objectives.

He may make use of the

above considerations in

arriving at his decision.

Conclusion

This article was written by Poon Yew Hoe, Managing Partner

of Crowe Malaysia PLT. Professionally, he specialises in

taxation and heads the tax division of the firm. Having been in

practice since 1983, Yew Hoe has diverse experience in

auditing, taxation and business advisory matters.


About us

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© 2021 Crowe Malaysia PLT

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